Court provides clarity on standard of proof in FBAR dispute

The United States of America filed suit against a taxpayer for his alleged “willful” violation of the requirement to report an interest in a foreign account. The government had already established the taxpayer was required to file a Report of Foreign Bank and Financial Accounts (FBAR). The court is asked to determine which standard of review is required to establish if the violation was willful.  

What was the outcome of the case? The government argued it only needed to establish the violation was willful by the preponderance of the evidence standard. The taxpayer countered that the clear and convincing evidence standard was more appropriate for this case. The clear and convincing standard is a more rigorous standard.

Ultimately, the court’s analysis turned to precedent. In the past, courts have often required the government meet the clear and convincing evidence standard in cases that involve “particularly important individual interests or rights.” Examples include issues of deportation and the termination of parental rights. The court reasoned that the penalties tied to this violation did not rise to this same level. As such, the preponderance of the evidence was appropriate.

What does this mean for taxpayers? Essentially, this ruling makes it easier for the government to establish that a violation of foreign asset reporting requirements was willful. A violation generally receives a civil penalty that will not exceed $10,000. If deemed willful, the penalty increases to $100,000 or 50 percent of the value of the account at the time of the alleged violation, whichever is greater.

It is also important to point out that this was a civil case. Criminal cases for FBAR violations can also include the threat of imprisonment. As such, any taxpayer under investigation by the IRS is wise to gather evidence to support his or her innocence. An attorney experienced with international tax law matters can help.

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